Liquidity Induced Asset Bubbles via Flows of ELMMs

Biagini, Francesca; Mazzon, Andrea; Meyer‐Brandis, Thilo

doi:10.1137/16m1107097

Cited by 5 publications

(3 citation statements)

References 60 publications

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“…of a network with a finite number of banks, and then we analyze the limit system (3.1)- (3.3). The bubble has the dynamics specified in Biagini et al [8], i.e. it solves (2.4) with…”

Section: Numerical Analysismentioning

confidence: 99%

Financial Asset Bubbles in Banking Networks

Biagini¹,

Mazzon²,

Meyer‐Brandis³

2019

SIAM J. Finan. Math.

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We consider a banking network represented by a system of stochastic differential equations coupled by their drift. We assume a core-periphery structure, and that the banks in the core hold a bubbly asset. The banks in the periphery have not direct access to the bubble, but can take initially advantage from its increase by investing on the banks in the core. Investments are modeled by the weight of the links, which is a function of the robustness of the banks. In this way, a preferential attachment mechanism towards the core takes place during the growth of the bubble. We then investigate how the bubble distort the shape of the network, both for finite and infinitely large systems, assuming a non vanishing impact of the core on the periphery. Due to the influence of the bubble, the banks are no longer independent, and the law of large numbers cannot be directly applied at the limit. This results in a term in the drift of the diffusions which does not average out, and that increases systemic risk at the moment of the burst. We test this feature of the model by numerical simulations.

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“…of a network with a finite number of banks, and then we analyze the limit system (3.1)- (3.3). The bubble has the dynamics specified in Biagini et al [8], i.e. it solves (2.4) with…”

Section: Numerical Analysismentioning

confidence: 99%

Financial Asset Bubbles in Banking Networks

Biagini¹,

Mazzon²,

Meyer‐Brandis³

2019

SIAM J. Finan. Math.

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“…In [10], microeconomic dynamics may at an aggregate level determine a shift in the martingale measure. Further references on asset price bubbles are [7], [8], [9], [32], [33], [34], [52]. For a comprehensive overview see also [47] and the entry "Bubbles and Crashes" of [42].…”

Section: Introductionmentioning

confidence: 99%

Asset price bubbles in markets with transaction costs

Biagini

Reitsam

2022

FMF

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<p style="text-indent:20px;">We study asset price bubbles in market models with proportional transaction costs <inline-formula><tex-math id="M1">\begin{document}$ \lambda\in (0, 1) $\end{document}</tex-math></inline-formula> and finite time horizon <inline-formula><tex-math id="M2">\begin{document}$ T $\end{document}</tex-math></inline-formula> in the setting of [<xref ref-type="bibr" rid="b49">49</xref>]. By following [<xref ref-type="bibr" rid="b29">29</xref>], we define the fundamental value <inline-formula><tex-math id="M3">\begin{document}$ F $\end{document}</tex-math></inline-formula> of a risky asset <inline-formula><tex-math id="M4">\begin{document}$ S $\end{document}</tex-math></inline-formula> as the price of a super-replicating portfolio for a position terminating in one unit of the asset and zero cash. We then obtain a dual representation for the fundamental value by using the super-replication theorem of [<xref ref-type="bibr" rid="b50">50</xref>]. We say that an asset price has a bubble if its fundamental value differs from the ask-price <inline-formula><tex-math id="M5">\begin{document}$ (1+\lambda)S $\end{document}</tex-math></inline-formula>. We investigate the impact of transaction costs on asset price bubbles and show that our model intrinsically includes the birth of a bubble.</p>

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“…In [10], microeconomic dynamics may at an aggregate level determine a shift in the martingale measure. Further references on asset price bubbles are [7], [8], [9], [30], [34], [35], [52]. For a comprehensive overview see also [47] and the entry "Bubbles and Crashes" of [42].…”

Section: Introductionmentioning

confidence: 99%

Asset Price Bubbles in market models with proportional transaction costs

Biagini¹,

Reitsam²

2019

Preprint

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We study asset price bubbles in market models with proportional transaction costs λ ∈ (0, 1) and finite time horizon T in the setting of [49]. By following [28], we define the fundamental value F of a risky asset S as the price of a super-replicating portfolio for a position terminating in one unit of the asset and zero cash. We then obtain a dual representation for the fundamental value by using the super-replication theorem of [50]. We say that an asset price has a bubble if its fundamental value differs from the ask-price (1 + λ)S. We investigate the impact of transaction costs on asset price bubbles and show that our model intrinsically includes the birth of a bubble.

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Liquidity Induced Asset Bubbles via Flows of ELMMs

Cited by 5 publications

References 60 publications

Financial Asset Bubbles in Banking Networks

Financial Asset Bubbles in Banking Networks

Asset price bubbles in markets with transaction costs

Asset Price Bubbles in market models with proportional transaction costs

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